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Pensions, Freedom and Death

22 Jul 2015

2 minute read

Alongside the major changes this year, known as Pension Freedoms (am I the only one who can’t help picturing George Osborne dressed as Mel Gibson in Braveheart?) we also had a major change in the taxation of pension funds on death.

The highlights of this change were to reduce the tax paid on death benefits paid from a pension, remove the distinction between drawn and undrawn pensions and enable pension funds to be cascaded down the generations.

Now, the tax position hinges solely on the age at death: under 75 = no tax; 75 and over = tax

On death, pensions can be paid either as a lump sum or can continue to be held in a pension and drawn as income. If death occurs under 75 then there is no tax payable. If death occurs after 75, pension funds drawn as income will be taxed at whatever the relevant income tax rates are for the beneficiary, whilst pensions paid as lump sums will be taxed at 45%. (Although, the plan is to also change this to marginal rates of income tax also).

Pension benefits, whether drawn or undrawn, can now be paid to

(a) a dependent

(b) a nominee (nominated either by the member or the trustees of the pension)

(c) a successor

A successor is someone who inherits the pension fund which had previously been passed to a dependent or nominee. So it is now possible to have your pension fund pass to your husband or wife and, when they have finished with it, pass anything that is left to your children for example.

These changes are so wide reaching that it is important that you review what will happen to your pensions if you were to die. For example:

  • Will your pension schemes allow the full flexibility of the new death benefit regime? Although legislation allows it, not all pension scheme rules will be amended to facilitate;
  • Presuming you have made a nomination, is this up to date? If you have drawn your pension and leave a dependent for example, your fund cannot be paid to anyone else other than a lump sum unless you have specifically nominated them;
  • It has been common practice to nominate a “Spousal Bypass Trust” to keep the pension funds out of the IHT net but still accessible to your husband or wife – this may no longer be the best thing since a lump sum payment to a trust if you die over 75 will be taxed at 45%;
  • However, if you don’t use a Trust, where might the pension funds go after your immediate beneficiary has died? This is now controlled by their nominations and out of your hands;

This is going to become an increasingly complex area and one which may need input from financial planner, tax adviser and lawyer, but one with much greater scope for Inheritance Tax and Estate Planning. To help with your plans, please contact Ed Gibson at ed.gibson@shawgibbs.com or call 01865 292200.

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